Take care of your annuity

Thousands of people coming up to their retirement could be buying the wrong annuity, leaving them up to 20 per cent poorer in old age.

Thousands of people coming up to their retirement could be buying the wrong annuity, leaving them up to 20 per cent poorer in old age.

Independent annuity experts accused life companies this week of giving confusing information about their own products and far too little detail about what else is on offer, and encouraging people who have bought their pension plan to buy an annuity from them as well.

In some cases life companies manage to retain more than 90 per cent of customers. This is particularly serious, experts say, because these companies offer some of the least competitive rates on the market. And once you are locked in to an annuity, it is very difficult to escape.

Deborah Simon, a consultant at London-based independent financial advisers Arbuthnot Weinel, said: "A short time before your policy is up, your life company asks you to consider buying an annuity with them. They do say you can take it to another company, but they don't shout about it. However, companies that are good for pensions are not necessarily good for annuities. "

According to a recent Mori survey, barely 15 per cent of people even know what the "open market" is. The term means when you buy your annuity from a different provider from the life insurance company that you have saved for your pension with.

Stuart Bayliss, director of specialist annuity advisers Annuity Direct, said a major reason for the lack of awareness is that life companies send out confusing information.

"The language companies use can mislead people. They will state all of the options available through them and, often on a second page, say that you can exercise the option to go to the open market," he said.

"However they also give their rate and say it's available for the next 14 days. People think they must decide within that time, rather than that particular rate is available for two weeks and then may change."

The people missing out most are those with illnesses or habits like smoking that may shorten their life, who should get a higher annuity. Life firms rarely offer these people the types of deal they can get elsewhere.

Evergreen Retirement Assurance, a specialist provider, can offer customers with a heart condition or high cholesterol an annuity that pays out up to 20 per cent more a year than traditional providers.

Evergreen, which was set up this year, is fighting to enlarge its share of the annuity market, which was worth £7bn last year. Bob Bullivant, head of corporate development at Evergreen, said: "About £4.3bn of that £7bn is not finding the right home for people. If people do not explore the options they are providing a free lunch for insurance companies."

It pays to shop around - many conventional companies have an enhanced annuity rate for people likely to die sooner but do not actively offer it to customers.

Mr Bayliss said: "Companies say that they do not know if customers have a serious illness and so do not offer enhanced annuity rates. However, some customers have waiver-of-premium policies [for people with long-term illnesses which, in the event of deterioration, mean that the life company will pay the premiums].

"These people are sent for a medical at least every other year and so the company knows their medical state and yet, on retirement, they say nothing about an enhanced rate."

In other cases your own life company will not tell you about all the products on offer. Until last month customers of Prudential would only have known about its with-profit and retail price index-linked annuities if they had gone to a financial adviser. The Prudential's own letter to customers on the verge of retirement did not mention them.

Those least aware of the open market are the ones who would benefit most - those on low incomes with modest pensions. "Less than 20 per cent of people take advantage of the open market. That percentage is higher among people with a pension of less than £40,000," said Mr Bayliss.

It is a problem that will only grow, with an ageing population and ever-falling levels of annuity returns. However, the Government and the regulator, the Financial Services Authority, seem unwilling to prioritise it, when more headline-grabbing issues like pensions mis-selling and under-performing endowments remain topical.